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FRM Part II · FRM Exam Part II · Guidance on Managing Outsourcing Risk

Which description best captures outsourcing risk as a category of operational risk for a financial institution?

Outsourcing risk is the risk of loss, disruption or compliance failure arising from relying on an external provider to perform activities the institution would otherwise do itself. It is an operational risk, not a market, credit or funding risk, even though it can interact with them.

  1. AThe risk that market prices move against positions held by the service provider
  2. BThe risk of loss or disruption arising from reliance on a third party to perform activities the institution would otherwise perform itselfCorrect
  3. CThe risk that a borrower of the institution defaults on a loan that the provider originated
  4. DThe risk that the institution's funding costs rise because of the provider's credit rating

Explanation

Outsourcing risk is an operational risk arising from dependence on external parties for activities, services or processes. It covers failures in service, data, security and compliance. The other options describe market, credit or funding risk, which are different risk types.

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